If you are a political junkie who happens to have a primary addiction to energy issues, you need to read a terrific article in the August 5, 2009 New York Times titled ‘Fragile Compromise’ of Power Plant CEOs in Doubt as Senate Climate Debate Nears. Darren Samuelsohn and Katherine Ling apparently found some sources willing to share details about the way that electric utility company leaders got together to iron out a deal acceptable to Representatives Waxman and Markey determining a formula to allocate carbon dioxide emissions allowances and credits.

Presented by the Edison Electric Institute which claimed unanimous agreement among its 80 members, the deal is that emissions allowances provided to the electric power industry would be split based on a formula where 50% of the weighting comes from historic emissions levels and 50% comes from historic retail sales. The allowances would be provided to retail distribution companies, which are all regulated by states; this part of the deal is aimed at alleviating any concerns about windfall profits since rates set by states would include the allowances in the formulas establishing a cost basis.

The goal set by EEI was that electric power utilities would be granted at least 40% of the free allowances since they produce 40% of the carbon dioxide emissions. This part of the deal was dialed back in negotiations with the House members; the electric utility industry actually received about 22% of the total allowances to be distributed. That smaller-than-desired block of allowanced will be given to distribution utilities based on the EEI recommended 50-50 formula of emissions to retail sales.

According to ‘Fragile Compromise’ there is a growing chorus of dissent from a group of coal-heavy utilities who either never signed up for the deal or who have calculated that the allocation formula places much of the cost burden associated with reducing emissions onto their customers. They believe that paying for the remaining allowances needed will require a disproportionate increase in electrical power rates to cover the cost of the pollution that can no longer be freely dumped out of their smokestacks.

For starters, MidAmerican claims the bill could raise electric rates for their customers as much as 25 percent if the House formula were to become law.

Minnesota Power, a Duluth-based company with about 150,000 retail customers in the state’s northeastern corner, said the House bill would leave it short by about 4 million allowances. Those allowances would cost about $60 million per year, about the same as the company’s annual operating revenue, according to Bill Libro, the company’s representative in Washington.

“It’s a pretty big number,” Libro said.

As for Black Hills Power Co., which has 68,000 customers in western South Dakota, eastern Wyoming and Montana, it can expect price increases of 43 percent based on its own estimates of the House bill, said Linn Evans, the company’s president and chief operating officer. And another subsidiary, Cheyenne Light, Fuel & Power Co., would see rates go up 37 percent.

The way that EEI was able to present its deal to Congress and claim that it had unanimous consent is that some of the most negatively affected utilities are either not members, were in the midst of boycotting the organization over other issues, or believed that any deal made in the House, where influence is often based on state populations, could be overcome in the Senate where even the least populated states have two senators. States like Montana, Wyoming, and Idaho – where coal fired electrical power generation enables low power rates – have influential members that can engineer compromises to help buffer the need for dramatic cost increases.

Some of the EEI members were simply happy that the organization was successful in steering the bill away from the idea that all allowances would be auctioned. By introducing the concept of free allowances distributed on some kind of formula based on prior pollution, the compromise served an important purpose in the eyes of the leaders of those utilities. Now that the bill has been passed by the House, the high fives have been shared by the staffers involved in the horse trading, and the representatives are on their way home to bask in the success of getting an agreement, the negatively affected utilities are working to build on the success of getting some free allowances to make an even better deal.

One of their main complaints is that the deal unfairly benefits utilities that have large portfolios of low and no emission generation. Some climate change advocates believe that the Waxman-Markey bill is a good compromise and the best deal that could pass. They dispute the notion that there will be significant benefit accrued to utilities like Exelon, Dominion, FPL, Constellation, Southern Company and Entergy, with their large portfolios of nuclear generation. According to Joe Romm at ClimateProgress.org any windfall profits have been prevented by the ruse of giving the allowances to the regulated distribution companies instead of to the power generators. (See, for example UPDATED exclusive report: Preventing windfalls for polluters but preserving prices — Waxman-Markey gets it right with its allocations to regulated utilities. )

Actually doing the analysis and running the numbers is complicated, and requires more explanation than I am willing or able to provide. However, in places where power generators compete in the wholesale market, and the price is determined through a competitive auction where the last generation needed to meet the load sets the price for all other generators, anything that raises the bid prices disproportionately benefits the power suppliers whose costs have not been changed. If a company like Exelon is bidding the output from its nuclear plants in a grid where all of the other generators must include the cost of purchasing pollution allowances or credits for each megawatt-hour in their wholesale bids, Exelon (or any of the other owners of nuclear generation) will benefit by selling power in a higher price market. If market sales prices increase without any cost increase, the difference falls directly to the bottom line.

If that sounds a bit convoluted or confusing, or if you simply believe that no electric power company would turn rules aimed at reducing pollution into a profit center, here is a quote from page 132 of Exelon’s most recent quarterly report to its investors. I apologize for the legalistic phrasing and the wordiness, but I wanted to include the entire context and let you read how the company describes the potential effects of climate legislation to its investors. Fortunately for people willing to dig and read, the laws of the land prevent a public company from hiding the fact that they plan to receive approximately $1.1 BILLION based on a $15/tonne CO2 allowance price. (Presumably, a higher price for CO2 leads to increased revenue for Exelon.)

On June 26, 2009, the U.S. House of Representatives passed H.R. 2454. Among its various components, the legislation proposes mandatory, economy-wide greenhouse gas (GHG) reduction targets and goals that would be achieved via a Federal emissions cap-and-trade program. Regulation under a cap-and-trade program of carbon dioxide (CO2) emissions from fossil generation is expected to increase wholesale power prices beca
use generating units would seek to recover their cost of compliance with carbon regulation. Due to its overall low-carbon generation portfolio, Exelon expects to have an advantage over fossil fuel powered generation under a cap-and-trade program. Exelon has estimated that its revenue during the first year of compliance after enactment of H.R. 2454, as currently drafted, could increase by approximately $1.1 billion, assuming $15/tonne CO2 allowance price and other assumptions, including but not limited to, merchant coal allocations. Exelon’s estimate is based on only one of several potential outcomes of the legislation and is not a forecast for the impact of any proposed or enacted legislation on its results of operations, cash flows and financial position. Exelon supported the passage of H.R. 2454 in the House of Representatives and views the legislation as balancing the need to protect consumers, business and the economy with the urgent need to reduce the emissions of GHGs in the United States. The Senate is expected to consider its own version of the legislation sometime later in 2009 or in 2010. Exelon supports the passage of comprehensive climate change legislation during the current Congressional session. Any legislation passed by the Senate would need to be reconciled with H.R. 2454 and signed by President Obama before legislation would become law.

Unfortunately, the track record for companies that benefit from this legislation indicates that any monetary flow that can be captured will go to the executives and the share holders. There is little chance that it will go to the people who have been forced to breathe polluted air, to increased electric utility employee count, to higher paychecks for the nuclear trained people who are responsible for the emission free generation, or even to increased investment in new nuclear power plants. Somehow that is just wrong.

There is no doubt that the game remains in progress. It will provide for interesting reading, thinking and discussing for several months to come. I am going to stick my neck out a bit and predict that there will not be any bill passed and signed within the next six months.